The revised prudential framework for resolution of stressed assets will have negligible impact on the current stock of bad loans, but the impact will be seen in the next cycle, say brokerages.
The latest regulation is expected to give flexibility to lenders since it allows an extended timeline to implement a resolution plan for stressed accounts.
According to Kotak Institutional Equities, the impact will be negligible as banks are already past their peaks in terms of bad loan recognition and provisioning. The decline in non-performing assets could slow down as banks can look at resolutions with improved recovery rates in mind.
“The early warning indicators are not showing any serious signs of stress and this is visible in the slippages reported by banks in FY2019. With a strong coverage ratio being built over the past few years, even the public banks are gradually getting back in shape. We are seeing a firm decline in NPL ratios for banks. Banks probably need to take stock of their NBFC and real estate exposure where risks are slowly moving towards solvency for a few players,” the brokerage went on to note.
But, according to Prabhudas Lilladher, lenders will start adding new names (accounts) under the revised framework, which could increase provisions. “Provisions could still be higher as implementing plans within 180 days (210 days including review period) will be not easy… Although, with banks at over 60-70 per cent provision coverage ratio already and given the higher recovery prospects (`1 lakh crore) we should continue to see gradual earnings recovery,” it reasoned.
Meanwhile, Kotak said the next cycle could take a different shape when the impact of the revised guidelines becomes visible.
“It is quite likely that the corporate NPL cycle may or may not be as painful as it was in the current one. Borrowers are aware of the risk of insolvency and lenders are better equipped with data from CRILIC – which should perform as well as credit information bureaus are helping retail banks,” the brokerage pointed out.
Borrowers have been consolidating over the past few years with strong balance sheets expanding through the acquisition of stressed projects. Analysts anticipate a gradual consolidation with fewer public sector banks and a gradually declining share in the overall business.
A different shape to next cycle
According to Kotak Institutional Equities, while the impact will be negligible as banks are already past their peaks in terms of bad loan recognition and provisioning in the current cycle, the next cycle could take a different shape.
“Borrowers are aware of the risk of insolvency and lenders are better equipped with data from CRILIC – which should perform as well as credit information bureaus are helping retail banks,” the brokerage pointed out.